If you're trying to figure out the best payment arrangement for your new mortgage, you may already have considered going with a bimonthly or biweekly payment plan. The two might seem similar at first, but the differences are significant. Bimonthly payments can make your monthly payments easier to handle and take a small bite out of the cost of your loan. Biweekly payments, however, can increase your interest savings dramatically and significantly reduce the overall amount you pay.
The Biweekly Plan Defined
Biweekly mortgage payments are due once every two weeks, year-round. The lender calculates these payments on a 14-day cycle that has nothing to do with the month of the year. Over 52 weeks, you will make 26 payments on your biweekly loan, which is more than a bimonthly arrangement will require. This difference can mean a bit higher annual expense but a shorter overall loan term.
If you have a 30-year mortgage, biweekly payments will reduce both the overall length and cost of the loan, since you will only make payments for a total of 23 years and 11 months. You'll own the home more quickly and pay less interest to do so.
The Bimonthly Plan Defined
Bimonthly mortgages come due twice a month on the dates agreed-upon by you and your bank. Typically, payments come due on the 1st and the 15th of every month no matter how many days are in the month or how many weeks are in the year. This arrangement makes for 24 payments rather than the 26 payments of a biweekly arrangement.
Though you're making payments more often, the term of the loan will be only slightly reduced, since you are still making only 12 full mortgage payments per calendar year. A bimonthly plan can make your budgeting a bit easier but doesn't cut into the mortgage principal to any significant degree. For example, over the term of a typical 30-year loan, opting for bimonthly payments over the traditional monthly arrangement will reduce the number of payments you make by a total of one.
Service Fees and Charges
In many cases, biweekly and bimonthly payment plans come with a variety of fees from the lender. Your lender may charge you for joining the program to cover the cost of arranging the paperwork or managing the increased number of payments you'll be making. A small fee for a biweekly loan may prove worthwhile since the money you save on interest is substantial. Think twice, however, about a bimonthly loan.
The fees involved with a bimonthly loan may not be worth it, since you are essentially paying the loan in the same amount of time as someone with a traditional monthly payment. You don't save o interest or pay the mortgage any faster with a bimonthly loan. Instead, you are basically paying the bank to hold your two payments and apply them to the loan at the end of the month. It might make more sense to keep the money earning interest in your account rather than giving it to the bank prematurely.
If you want to make biweekly or bimonthly payments on your home loan without fees, skip the bank and do the legwork yourself. To achieve the results of a biweekly plan, simply divide one monthly mortgage payment by 12 and add the result to your mortgage check every month. The result will be the same as if you'd had a biweekly mortgage all along. If money is tight one month, you can simply skip paying the extra money without upsetting the bank.
If dividing the monthly payment in two makes it easier to handle for you, open a checking account specifically for mortgage payments and deposit half of each month's payment on the 1st of the month and the other half on the 15th, then write the check. There is no need to pay a bank for services you can provide for yourself.
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